Felix Salmon

An idea for how to deal with second liens

Felix Salmon
Mar 22, 2011 05:22 UTC

I had a long conversation with Jesse Eisinger today on the subject of second liens and the proposed mortgage settlement from the state attorneys general.

Second liens are clearly causing a huge problem in both the mortgage market and the banking market, as Mike Konczal clearly explains. They’re being held on banks’ books at what looks like extremely inflated values, and those banks are also overwhelmingly the entities servicing first-lien mortgages. As such, the banks are quite happy when homeowners default on their mortgage — that frees up cashflow to continue paying the second-lien loan.

It’s not at all obvious why homeowners would continue to pay their second mortgage even when they’re delinquent on their first, but that seems to be exactly what’s going on: the CEO of JP Morgan Chase Home Lending has said that some 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. This is unfair to investors in first liens, who are senior to the banks with the second liens but who are in many cases more likely to be asked to take a haircut on their loan.

The AGs seek to deal with this problem by saying that if a first-lien mortgage is modified, then the second lien must be marked down at least as much. That seems sensible to me, but it’s insufficient to Jesse, who reckons that treating the two liens equally is going to become some kind of de facto standard.

That said, the proposal is clearly an advance on what we have now, where the best-case scenario for second-lien holders is to see the first lien modified while the second lien gets paid off in full and on time. And it’s not at all obvious what would improve on the AGs’ proposal. Writing second liens down to zero is too harsh: it would unnecessarily damage the banks, and it would render pointless all of the underwriting they did to ensure that there was some kind of debt-repayment capacity beyond just collateral.

Jesse thinks that if the banks are forced to write down their second liens to something a bit more realistic, or if at least they’re required to increase the reserves they have to hold against them, then they will be more likely to accept write-downs on those loans. He might be right: I’d love to see some research on that front. In principle, banks have every incentive to fight to extract as much money as possible out of every loan that they own, whether they’ve written it down on their books or not. But here’s the difference: if they’ve written it down they’re chasing profits when they do that, and if they’re holding it at par then they’re trying to avoid losses. If banks fight harder to avoid losses than to chase profits, then forcing write-downs might do some good. Certainly humans feel that way, so it’s not impossible.

I also had one idea of my own. It’s probably not original, but I haven’t seen it anywhere else, so I don’t know what the objections are. In any case, how about this: any time a first lien is modified, the second-lien holder loses their security interest in the home. The debt outstanding remains just as payable as it ever was — it just remains unsecured. So if the first-lien holder writes down the mortgage to less than the value of the house, the second-lien holder can’t then swoop in and foreclose if there are payment difficulties.

In most of these cases, the second lien is de facto unsecured anyway: this rule would turn secured debt into unsecured debt, which would force the banks to make more sensible reserves against it — and would also allow homeowners to only fear foreclosure if they default on their modified mortgage, rather than on either the modified mortgage or their second mortgage/Heloc. Meanwhile, the banks which own the second loans wouldn’t have to write them down if they felt that the homeowner was a good credit.

It’s not going to happen, of course: anything along these lines would require new legislation, and there’s no chance of that. But I’d still be interested in what people thinking about how to deal with second liens react to the idea. It might at least help clarify some of the issues involved.


Chapter 7 BK in 2009. Primary home exemption put 2nd HELOC mtg into a unsecured gray area. Both mortgages discharged. Since then House value since BK dropped further. Due to condition of roof and basement and general condition of house it is worth less than the payoff of the first. Would like to stay Modification of first is just out of reach and haven’t paid anything on second since bk in 2009. Would like to know statue of Limitation for the second lien. or if it was wiped in bk and they are trying to collect on a discharged unsecured debt. Made an offer in 2010 of 10% on 2nd. and they said no We want it all plus late fees ect. They have since then called me once a year to see what I am doing with the house. They know it it underwater. I told them if I sell it would be a short sale and they would get nothing, If I walk away they would get nothing and if the 2nd could force a foreclosure they would still get nothing and I still have an option of a chapter 13 BK and have the lien stripped. Shouldn’t have the 2nd been stripped during charpter 7 in the first place. The uncertainty of this lien is driving me crazy. Can the first mortgage holder make they 2nd go away.

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NYT reveals its paywall hopes

Felix Salmon
Mar 21, 2011 15:48 UTC

Jeremy Peters reports on the NYT’s internal paywall math:

The Times will not say publicly how many online subscribers it hopes to get. But company executives have said privately that the goal for the first year is 300,000. And Mr. Sulzberger and Ms. Robinson insist that the plan is not intended for short-term gain.

“This is not a bet on this year,” Mr. Sulzberger said. The question that remains to be answered is whether that bet pays off in 2015, 2020 or ever.

300,000 subscribers paying on average $200 per year (some will pay more; others will not renew every four weeks for a whole year) works out at $60 million — or less than 20% of the NYT’s digital advertising revenues. It’s a big enough number that I can certainly see why the NYT spent a long time considering this move. But it’s not so big as to be a no-brainer.

That said, if the NYT can get 300,000 paying subscribers — not including people from the Lincoln dealand it can do so while maintaining online ad revenues, then I think the paywall will have worked. One huge unanswered question here is whether advertisers will be willing to pay a premium for reaching readers behind the paywall — if they are, then it’s conceivable that ad revenues might even go up. (And that would also explain why Dealbook is free: it already gets premium ad rates.)

Still, that’s a lot of ifs. Which is where I take issue with David Carr:

The Web was built on collaboration, open networks, and a friction-free flow of information. And the Times attempt – however considered, however nuanced – is an offense against that theology.

And that’s what it is: a theology. One need only read many of the bloggers and commentators in the wake of the announcement to see that what the Times is being accused of is not greed, but heresy.

In reality, the theology comes in statements like this:

“I believe that our journalism is very worth paying for,” said Jill Abramson, The Times’s managing editor for news. “In terms of ensuring our future success, it was important to put that to the test.”

There are two theological statements here, which I hear a lot from NYT journalists. The first is the idea that if you can charge for certain content, then obviously you should. And the second is the idea that charging for content will automatically “ensure future success.” Neither is exactly self-evident. Nor, for that matter, is Arthur Sulzberger’s idea that if the NYT suddenly turns the meter to zero in the wake of a big event like 9/11, then the readers will come flocking back the minute they’re able to. They won’t: once you become habituated to avoiding the NYT, and learn to get your news elsewhere, you’ll continue to do that no matter where the meter is set.

But for the record: I’m skeptical that the NYT will be able to get to 300,000 paying digital subscribers this year. If it does, then the paywall will definitely be more successful than I anticipated, and I’ll happily eat a little bit of crow. Here’s hoping!


Now that the “Gucci Set” has solidified it’s grip on the American media and geopolitical landscape, and the middle class has joined the bread lines, it is inevitable the war-justifications and spin offered by the NY Times will appeal only to a vanishing cross-section of society. They have completely lost all journalistic credibility to those who have been victimized by the Times’s whitewashing of 9/11, pandering to every proposed military intervention and generally elitist editorial stance. Soon only Hedge fund managers and Billionaires will read it so they don’t have to admit the Emperors wear no clothes.

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Revisiting my Japan post

Felix Salmon
Mar 20, 2011 20:18 UTC

This time last week, I was asked if I would go on Piers Morgan’s CNN show to talk about donations to Japan. I said yes, and reckoned that if I was going to go on national TV talking about such things, I ought at least to have a blog entry up on the subject. So I wrote this.

It’s the job of an opinion writer to stake out clearly-defined and controversial opinions, and anybody in this business has to have a reasonably thick skin. And I knew, more or less, what I was getting myself into: the very reason that I was asked onto the Piers Morgan show to begin with was that I’d written something very similar about Haiti, and a lot of people didn’t like that.

In the end, the Piers Morgan appearance was canceled. But my blog post went viral, and not in a particularly good way. One week, 248 comments, and 7,269 Facebook recommendations later, I’m wondering what happened.

I’m used to criticism — I even got an honest-to-goodness death threat once, after I warned (erroneously) that Morgan Stanley was toast and likely to get nationalized. But the degree of anger and hatred leveled at me over the past week is nothing I’ve ever experienced.

It’s worth making very clear, in case anybody was wondering, that this is one of those situations where my opinion is most emphatically not that of my employer, which is putting a lot of effort and money into raising earmarked funds for Japan.

The debate is clearly an important and meaningful one. My advice was entirely in line with the detailed analysis from GiveWell, which concludes that “the relief/recovery effort does not have room for more funding” and that “you as a donor do not have the power to improve the relief and recovery effort in Japan.” It’s also in line with Stephanie Strom’s reporting for the NYT. And so far, I haven’t seen any real pushback to the substance of what they’re saying.

The media reaction to my post was generally somewhere between respectful and positive — see Weekend Edition’s coverage, for instance, or Slate’s. And in general it’s hard to find independent commentators who think that donating earmarked funds to Japan is a particularly good idea. Tyler Cowen probably comes closest: he says that there are no corruption worries in Japan; that sending money is an important signaling mechanism showing US solidarity with Japan; and that even though you could give unrestricted funds instead, you probably won’t, and that therefore something is better than nothing.

But substantive debate was something sorely missing in the comments to my post, which rapidly generated into a startling series of ad hominem attacks on myself personally — I’m evil, I’m racist, I deserve to die, I should be fired, that kind of thing — interspersed with other comments pointing out that the attackers didn’t seem to have read and understood what I’d written.

Where did all those comments come from? I suspect that a lot of them came from people following a link from Facebook, where my story showed up like this:


There’s no nuance there, just a stern-looking headshot, a stark headline, and what looks very much like gratuitous provocation. People who have donated money to Japan, or who have friends or family in the affected area, are naturally going to respond aggressively if they see something like this. By the time they click through to the actual article, it’s too late for my argument to carry the day: they’re angry, and they’re going to express that anger in my comments.

Those comments were particularly effective because they were read, by myself and by many other people inside and outside Reuters. That’s not always the case, online: if you’re a writer or editor for HuffPo or Yahoo, the volume of comments is simply too great to even think about reading them all. So if a comment thread degenerates into a flame war, people tend not to notice as much. Even in my own case, I get thousands of comments on posts which are republished on Seeking Alpha, and generally read none of them.

But I’m very proud of my commenters here at Reuters, I respect them a lot, and know full well that on any given subject I have many readers who are much smarter and more knowledgeable than I am. And it turns out that when I get a large number of commenters who aren’t regular readers of my blog, it’s hard to snap out of the habit of reading them with a certain degree of respect.

My blog is a place for pretty high-level debate and discussion surrounding issues in the news. It assumes, for instance, that people implicitly understand the orders of magnitude between the amount of donations being targeted at Japan and the amount of money that it’s going to cost to rebuild the country and aid the victims of the earthquake and tsunami. Or that Japan, with its overvalued currency and too-low inflation, would actually welcome any short-term inflation and depreciation which came from printing money to pay for reconstruction.

But while these are familiar concepts to my blog’s regular readers, they’re not necessarily familiar to people on the internet more generally. “There’s nothing you can do to help” is never a pleasant message to convey, and people tend to react strongly against it. On top of that, decades of fundraisers sending the message that “every penny helps” have clearly done their job — which is to conflate, in the public’s mind, the act of helping with the act of donating money, to the point at which a message of “don’t donate to Japan” is read as saying, in substance, “don’t help Japan.”

Would it have been better, then, for me to make the same point less forcefully? A large contingent of the commenters on the post think so: they’re the ones saying that the message is fine, but the headline is insensitive and needlessly provocative in a time of great emotional turmoil and strain. I’m torn on this one, but I think that in general sugar-coating and euphemism are invidious: if you’ve got something you want to say, you should just come out and say it. And given that it’s impossible to know in advance when a post is going to break out from my normal readership, the result of such a policy would surely be a lot of unnecessary and harmful self-censorship.

On top of that, as Nick Denton never fails to remind me, commenters are by no means representative of readers as a whole. If a tiny fraction of 1% of the readers of the post have a strong negative reaction to it and leave angry comments it, that’s entirely consistent with 99% of my readers understanding exactly what I was trying to say, and maybe even learning something and viewing the world of aid and philanthropy in a way they hadn’t thought of before.

In hindsight, I do wish that I’d spent a bit more time on the post instead of rushing it out between panels at SXSW. But I doubt that would have made a huge amount of difference. In future, though, I think I will be more conscious of how the headline and first two sentences of my posts are likely to come across on Facebook. When I’m aggregated by humans, they make sure to get the message across quite clearly. But Facebook’s bots aren’t that smart, and the message can easily be lost completely.


For brilliant reportage, with many chilling, and also encouraging, photographs, see:

http://jasonkelly.com/2012/03/one-year-l ater/

Sadly your hasty post was misjudged – thanks for re-visiting it.

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Lincoln offers free access to the NYT

Felix Salmon
Mar 18, 2011 20:02 UTC


Here’s a way of monetizing the NYT’s paywall which I have to admit I hadn’t thought of: get advertisers to foot the bill!

I like this model a lot. I don’t know how much Lincoln is paying for this promotion: apparently the interstitial is being shown to about 200,000 regular nytimes.com readers without print subscriptions, with the intention that it will be adopted by roughly half of them. (Which goes to show how quickly people click past interstitials without reading them: this is basically free money that the other half are passing up.)

The subscription is the same one that you get for $15 a month: unlimited access to the NYT on the web and on smartphones, but not on the iPad app. If people taking Lincoln up on its offer want iPad access too, they’re going to need to pay an extra $20 per month — which I’m sure very few if any of them will do. So at the margin, this promotion is sure to further marginalize the iPad app as a source of NYT news.

If Lincoln were to pay the full $15 every four weeks from March 28 through the end of 2011, that would work out to $146 per subscriber, or $14.6 million. I’m sure that Lincoln isn’t paying that much. But even at a heavily discounted rate, the NYT is getting some healthy revenue here.

There are lots of unanswered questions here, though. Mainly: how does total revenue from Lincoln compare to the amount of revenue that the paywall would otherwise have extracted from the people shown the Lincoln ad? This promotion bespeaks a certain amount of insecurity on the part of the NYT: it’s willing to lock in Lincoln’s money now, rather than take its chances on trying to persuade a good proportion of those 200,000 people to sign up for the paywall.

The people who sign up for the Lincoln promotion aren’t handing over their credit-card numbers: they won’t automatically start getting billed when the promotion expires in 2012. And they’ll also learn that if you’re not a subscriber, you get shown offers for a free subscription. (Because I’m already a print subscriber, I’ll never see the ad.) In that sense, promotions such as these serve as an incentive not to subscribe individually.

The bigger picture here is that Lincoln is spending a large chunk of change from its advertising and promotions budget and giving it to the NYT. What’s the NYT going to do with the money? Will it consider it ad revenue, just like all the other money it gets from Lincoln? Or will it throw the money into the subscriptions bucket to make the paywall look more successful? If and when the NYT starts releasing numbers for digital subscription revenues, will they include this kind of promotion, even if brands like Lincoln would have found some kind of way of spending that money at the NYT regardless? I can imagine that debates over the success or otherwise of the NYT paywall are going to get pretty heated.

And while I’m on the subject, I have one other question about the paywall which I haven’t seen answered. The quota resets to zero at the first of every calendar month. So what happens if, say, my subscription expires in mid-July, after I’ve already used my subscription to read more than 20 articles that month? Does the paywall go flying up immediately, as soon as the subscription expires? Or do I still get 20 free articles that month — and then another 20 free articles in August? I can see why it makes sense for the NYT to tell me that I’ve read more than 20 articles and so I’m not entitled to read any more. But if I paid for those articles, why can’t I get any free articles, like non-subscribers can?


Yes, I received the Lincoln offer pop up, responded to it accepting the offer, and nothing happened. I have never received an email confirming the complimentary offer. When I wrote emails to the Times, the customer service department confirmed that they were having problems with the program, but no resolution has ever occurred. When I called the Times, I was told I never received the offer and no help was provided. This whole thing is a frustrating, poorly executed flub. Left a terrible taste and a huge waste of my time trying to resolve the snafu.

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The case of the missing primary documents, Bloomberg edition

Felix Salmon
Mar 18, 2011 19:09 UTC

Caleb Newquist has a great post up at Going Concern showing how important it is for news organizations to publish primary documents, rather than just report what’s in them. He’s reacting to Boris Groendahl’s story at Bloomberg, headlined “HSBC Was Told About Madoff ‘Fraud Risks’ in Two KPMG Reports.” The story is pretty clear: KPMG warned HSBC twice — once in 2006 and once in 2008 — that there might be fraud going on chez Madoff.

But Groendahl and Bloomberg have posted neither the 56-page 2006 report nor the 66-page 2008 report: they’re telling, rather than showing. And they’re raising all manner of questions by doing so. Here’s Newquist:

What if the “risk factors” listed are just standard boilerplate risks that are included in every single one of these reports? If that’s the case, then KPMG was slapping in the applicable information as it related to BLM, handed it over and collected a nice fee. Maybe KPMG was all over this but there’s no way to know because A) Bloomberg didn’t republish the reports in full; B) Other KPMG teams close to Madoff are getting their asses sued which means they either ignored the risks or couldn’t get a hold of these two reports…

Did KPMG warn HSBC or not? This Bloomberg story seems to think so but there are is a lot of evidence that KPMG was just as clueless as as everyone else.

All these questions could be settled very easily by simply publishing the reports alongside the story.

There are three main reasons why news organizations don’t do this. The first is that they promised their source they wouldn’t; the second is that they’re worried about being sued for copyright violation; and the third is that they don’t want to give away to their competitors information which they worked very hard to obtain.

But the fact is that if you’re going to publish a story saying that KPMG warned HSBC about Madoff, and you have the proof, and you don’t supply your readers with that proof, you’re doing them a disservice. Groendahl and Bloomberg should try as hard as they can to get those reports up online. And if any of my readers have them, feel free to send them over: I promise to post them immediately.


Felix Salmon
Mar 18, 2011 05:41 UTC

It seems that the NYT has persuaded Lincoln cars to sponsor free digital subscriptions thru 2011 for “an exclusive group of frequent visitors” — Twitpic

THIS is where you should be donating your money: Ivory Coast’s Health System Collapses, MSF Steps in — VOA

Special Report: Mistakes, misfortune, meltdown: Japan’s quake — Reuters

Lack of Leadership Prolongs Mortgage Settlement Talks — American Banker

Moral for CEOs Is Choose Your Fraud Carefully — Bloomberg


http://money.cnn.com/2011/03/15/real_est ate/rent_rise_housing/index.htm

Not at all sure where Peggy Alford (the quoted “expert” with a vested interest) is getting these predictions from, but an interesting scenario regardless. She suggests several factors in play:

(1) Declining homeownership.
(2) High % of homes off the market due to foreclosure.
(3) Young adults moving out as they can afford to do so.

Towards the end of the article, it suggests that falling home prices may tempt renters to buy — but that might be limited to the markets where foreclosure rates were the highest. I suspect that rents will be going up (even if housing prices fall a bit more) in the other markets. Mismatch of housing inventory on supply and demand.

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The FDIC’s WaMu suit

Felix Salmon
Mar 17, 2011 23:17 UTC

The FDIC complaint against various WaMu officers makes for fascinating reading. I’ve embedded it below.

One thing that jumps out from the complaint is the enormous amount of very clear documentation here that the WaMu officers in question, up to and including Kerry Killinger, not only knew exactly what they were doing all along, but were very clear about it. They embarked upon an explicit strategy of increasing risk, by writing new mortgages, by concentrating on subprime, and by concentrating geographically. They were aware of the downside risks involved, and they went ahead with the strategy regardless. At the same time, they were very dismissive when it came to risk management.

There’s no indication whatsoever that the officers tried to hide what they were doing from their board or their regulators, or that they thought it was in any way wrong or illegal.

If the risks they took paid off, they would have been hailed as heroes, and the FDIC would have no problem with their behavior. There certainly wouldn’t have been a lawsuit like this one, since the FDIC has to show that it suffered damages before it can bring it.

I don’t like the idea of criminalizing failure. Banks by their nature are leveraged institutions which are vulnerable to runs and to declines in their asset values. There’s always a natural tension between managers, who are looking to maximize profits, and regulators, who are looking to minimize risks. But in this case there’s no indication that WaMu’s regulators, including the FDIC, expressed any concern about Killinger’s strategy. If they were OK with it, at the time, it’s easy to see how the executives considered that a green light to go ahead and implement it with gusto.

But at the same time, it’s unconscionable that these guys should be able to get away with what they did just because they did it out in the open, in front of supine regulators. They knew that they were too big to fail; they knew that ultimately WaMu’s liabilities (or at least its deposits) were being backstopped by the US government; and they knew that if they wanted to get their total compensation up into the $100 million range they were just going to have to take enormous risks and gamble with the money they had essentially unlimited access to at the Fed’s discount window.

Bankers have to be held to some kind of standard. And the standard put forward here, by the FDIC, in paragraph 184, seems a reasonable one to me. Indeed, it’s so clear and reasonable that it’s worth quoting in full:

As officers and/or directors, Killinger, Rotella and Schneider owed WaMu a duty of care to carry out their responsibilities by exercising the degree of care, skill and diligence that ordinarily prudent persons in like positions would use under similar circumstances. This duty of care, included, but was not limited to, the following:

a. To adopt such careful, reasonable and prudent policies and procedures, including those related to lending and underwriting, as required to ensure that the Bank did not engage in unsafe and unsound banking practices, and to ensure that the affairs of the Bank were conducted in accordance with these policies and procedures;

b. To communicate to the Bank’s loan officers and underwriters a clear expectation that they must adhere to sound lending policies and credit procedures by establishing a system of checks and balances and by careful monitoring of loan officers’ conduct;

c. To require that sufficiently detailed, current and reliable information be provided upon which they could make prudent decisions, including the use of current technology and internal control procedures to timely identify problems and allow for early remediation;

d. To support and foster WaMu’s internal risk management functions, and ensure adequate funding for these functions for a Bank of WaMu’s size and assets;

e. To develop contingency plans and take other proactive steps to limit or prevent significant financial losses in the held-for-investment single family residential home loans portfolio;

f. To consider and adopt reasonable recommendations from employees of WaMu’s Enterprise Risk Management department for controlling the Bank’s lending risks;

g. To timely acknowledge and adequately respond to changes in economic conditions that create additional risk with respect to certain types of products or transactions;

h. To enforce policies and procedures designed to ensure that loans would not be made based on inadequate or inaccurate information;

i. Upon receiving notice of an unsafe or unsound practice, to make a reasonable investigation thereof and to exercise reasonable business judgment with respect to all facts that a reasonable investigation would have disclosed;

j.   To carefully review reports of examinations and other directives of regulatory agencies, to carry out the instructions and orders contained in those reports, to investigate and cure problems noted therein, and to prevent any repetition of such problems and deficiencies; and

k.   To conduct WaMu’s business in compliance with all applicable state and federal laws and regulations.

To be sure, a lot of this is 20-20 hindsight vision. But at the same time, it’s basic common sense, and highly-paid bank executives should live and breathe this stuff every day. The fact that WaMu’s executives failed to do so was a significant contributor to a global financial crisis for which, to date, no senior executives have been found responsible at all.

This is by no means a cut-and-dried case, and I suspect that the FDIC will be more than willing to settle with the directors’ insurers before trial. The FDIC has always been particularly vindictive when it comes to WaMu, for reasons I don’t pretend to understand — something which comes out in this complaint when they decided to make the executives’ wives named defendants. It would be great, too, if the FDIC admitted it fell down on the job in terms of regulating WaMu in 2005-8.

Still, I’d like to see more of this kind of thing, rather than less. If only because that way it wouldn’t look like WaMu and its executives were being singled out. Where’s the equivalent suit, for instance, against Stan O’Neal?

Update: Here’s Steve Rotella’s response.



OK, perhaps I’m bit late to this party, but I do have a bit of a problem with the standard. Specifically, this part:

k. To conduct WaMu’s business in compliance with all applicable state and federal laws and regulations.

That is a high standard, and I very much doubt that any organization can reach 100 percent compliance. The rules are too many, they change too often, and there often are many areas within regulation and laws that are less than clear. I’d rather see the establishment of a reasonable compliance program rather than a declaration that one would comply with every conceivable legal standard. No compliance program will achieve perfection. But good ones will circle back when problems are unearthed and make improvements.

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Felix TV: The peculiar economics of event ticketing

Felix Salmon
Mar 17, 2011 21:57 UTC

Remember the weirdness surrounding LCD Soundsystem tickets? Well, it applies to sporting events too, as this video explains. Shortly after it was made, Jim Ledbetter sold his Knicks tickets for $500 each, which allowed him to net a pleasant profit on their $110 face value and still see the game from a cheaper section.

The NYT paywall arrives

Felix Salmon
Mar 17, 2011 16:30 UTC

The NYT paywall has arrived: it’s going up in Canada today, and then worldwide on March 28. The most comprehensive source for the gritty details is this FAQ, which does things like explain the difference between an item and a pageview. (A slideshow or a multi-page article is one “item,” no matter how many slides it contains.)

The NYT has decided not to make the paywall very cheap and porous in the first instance as people get used to it. $15 for four weeks might be cheap compared to the cost of a print subscription, but $195 per year is still enough money to give readers pause and to drive them elsewhere. And similarly, 20 articles per month is lower than I would have expected at launch.

Rather than take full advantage of their ability to change the numbers over time, the NYT seems to have decided they’re going to launch at the kind of levels they want to see over the long term. Which is a bit weird. Instead, the NYT has sent out an email to its “loyal readers” that they’ll get “a special offer to save on our new digital subscriptions” come March 28. This seems upside-down to me: it’s the loyal readers who are most likely to pay premium rates for digital subscriptions, while everybody else is going to need a special offer to chivvy them along.

This paywall is anything but simple, with dozens of different variables for consumers to try to understand. Start with the price: the website is free, so long as you read fewer than 20 items per month, and so are the apps, so long as you confine yourself to the “Top News” section. You can also read articles for free by going in through a side door. Following links from Twitter or Facebook or Reuters.com should never be a problem, unless and until you try to navigate away from the item that was linked to.

Beyond that, $15 per four-week period gives you access to the website and also its smartphone app, while $20 gives you access to the website also its iPad app. But if you want to read the NYT on both your smartphone and your iPad, you’ll need to buy both digital subscriptions separately, and pay an eye-popping $35 every four weeks. That’s $455 a year.

The message being sent here is weird: that access to the website is worth nothing. Mathematically, if A+B=$15, A+C=$20, and A+B+C=$35, then A=$0.

Meanwhile, at least where I live in New York, a print subscription which gets you the newspaper only on Sundays costs $19.60 every four weeks — and it comes with free access to the web and tablet versions of the newspaper. Which creates the slightly odd proposition that if you want to use the NYT’s iPad app, you’re marginally better off subscribing to the print newspaper on Sundays and throwing it away unread than you are just subscribing to the app on its own.

The pricing structure is also a strong disincentive to use the iPad app at all, of course. If you’re already paying $15 every four weeks to have full access to the website, why on earth would you pay extra just to be able to read the paper on its own dedicated app rather than in Safari? I, for one, prefer the experience of reading nytimes.com on the web on my iPad, rather than reading an iPad app which has no search, no links, no archives, no social recommendations, etc etc. If the NYT wanted to kill any incentive to read and develop its iPad app, it’s going about it the right way.

What does all this mean for the New York Times Company? I can’t see how it’s good. The paywall is certainly being set high enough that a lot of regular readers will not subscribe. These are readers who would normally link to the NYT from their blogs, who would tweet NYT articles, who would post those articles on Facebook, and so on. As a result, not only will traffic from these readers decline, but so will all their referral traffic, too. The NYT makes more than $300 million a year in digital ad revenue, so even a modest decline in pageviews, relative to what the site could have generated sans paywall, can mean many millions of dollars foregone. On top of that, the paywall itself cost somewhere over $40 million to develop.

Against all that, how much revenue will the paywall bring in? A very large number of the paper’s most loyal readers are already print subscribers, and get access to the website at no extra cost. So the new revenues from the paywall will only come from people who read the website a lot but who don’t subscribe in print.

How many of those people are there? Emily Bell reckons that the number of people who’ll even hit the paywall in the first place is only about 5% of the NYT’s 33 million or so unique visitors. That’s 1.6 million people — compare the 1.3 million people who already subscribe to the paper on Sundays. The former is not a perfect superset of the latter, of course, but there’s a big overlap; let’s say that realistically the NYT is going after a universe of no more than 800,000 people that it’s going to ask to subscribe. And let’s be generous and say that 15% of them do so, paying an average of $200 per year apiece. That’s extra revenues of $24 million per year.

$24 million is a minuscule amount for the New York Times company as a whole; it’s dwarfed not only by total revenues but even by those total digital advertising revenues of more than $300 million a year. This is what counts as a major strategic move within the NYT?

As Ken Doctor notes, the Times Select fiasco, which was unceremoniously killed in 2007 to no one’s regret, was bringing in a good $10 million per year. This new paywall is much more elaborate and expensive, and it’s being introduced into a website which is currently something of a cash cow as regards ad revenues.

So by my back-of-the-envelope math, the paywall won’t even cover its own development costs for a good two years, and beyond that will never generate enough money to really make a difference to NYTCo revenues. Maybe that might change if the NYT breaks its promise to offer full website access for free to all print subscribers. But that decision would be fraught in all manner of other ways.

For the time being, though, I just can’t see how this move makes any kind of financial sense for the NYT. The upside is limited; the downside is that it ceases to be the paper of record for the world. Who would take that bet?

Update: Turning upside-down the conventional wisdom that consumers will only pay for financial information and porn, the NYT has decided that Dealbook will remain completely free, outside the paywall, at least for the time being. Which I guess explains why the Business and Dealbook sections are so clearly separated from each other online.


To answers peoples questions- Yes disabling cookies and not signing in allows you to avoid the 20 article limit. I have tried it in Canada by going into Private Browsing mode (or Incognito mode on Chrome) and there are no restrictions on use. They aren’t using IP addresses to identify people. And you can create a mock NyTimes site with links to articles that would bypass the paywall as well, I tried this with a older tumblr account that I linked via proxy. You can also still use news fetchers and other bots to retrieve articles.
The whole paywall seems to suck, and it’s shocking that they spent $30 million on it. This type of thing shouldn’t cost more than a few thousand dollars to implement- its really not difficult coding to do, and there are more holes into it than swiss cheese.

Also I’m bitter that they haven’t announced anything for Kindle subscribers yet. I pay $20 a month for access and I won’t pay dime more. I’m not sure if Amazon has a feature that allows publishers to give codes or accreditation to their subscribers for their own websites (though I remember hearing something about it a while ago), and it would be trivially easy for Amazon to implement if they had to.

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